How to Cope with Too Much Growth

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There are few more self-evident financial truisms than the assertion that growth is a good thing for a company. But for a small business just getting started, an overwhelming amount of it can present problems. That’s what happened to John and Kira’s Jubilee Chocolates, a private Philadelphia company that now has 10 employees and that took in $750,000 in revenues last year.

To meet the demands of unwieldy growth, co-owner John Doyle went on a hiring spree between Valentine’s Day 2003 and Christmas Day 2004. But Doyle, a former banker, and his partner and wife Kira Doyle, a teacher, were still wet behind the ears in terms of efficient chocolate production. As a result, they lacked the experience to direct the employees they hired to perform in the most productive ways.

The Doyles also had too many employees in the summer, when chocolate-buying slides from its winter-holiday peaks. They hadn’t yet learned that the business actually needed seasonal employees who would be prepared to work only from August through February. Thus, the company’s labor costs from 2003 to 2004 were about 38 percent of revenues, compared with a targeted 20 percent, says John Doyle.

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Those difficulties, ironically, sprung from an unexpected stroke of luck. In late 2002, Doyle was still coping with the dual challenges of learning professional chocolate-making and running a business when opportunity came knocking in the form of Ruth Reichl. The editor of Gourmet magazine tried Doyle’s product at a chocolate tasting in Manhattan and a few months later put Jubilee Chocolates on her magazine’s February 2003 cover.

Orders poured in and continued to do so as The New York Times,BusinessWeek, and Money, among other publications, wrote about Jubilee. Administrative issues shifted to the back burner. The books would have to wait; there were chocolates to make. Besides hiring staff, Doyle worked seven days a week and enlisted friends and family to get the work done. But demand didn’t let up after Valentine’s Day. A year later the Williams-Sonoma catalogue picked up the chocolates, and business exploded even more.

To be sure, such unwieldy business surges are hardly mounting in epidemic proportions. Says small-business consultant Andrew Clarke of Chicago-based Ground Floor Finance, “It’s an exceptional company that has unmanageable growth.”

Nevertheless, many fledgling businesses can experience demand beyond their managers’ ability to cope. When that happens, the ensuing scramble can be just as harmful to a company’s fortunes as a slump, experts say. Besides the obvious perils of failing to fulfill orders and administrative commitments, business can suffer from uninformed or snap decisions made by harried managers.

Any Port in a Storm

As the Doyles’ experience shows, hiring can be a big problem area. Clarke recommends using temporary employees for lower-level, labor-intensive jobs like manufacturing or fulfillment whenever possible. Temps should be used at least until the beginning of the rapid growth period or until managers have their labor needs figured out, he adds.

Sometimes clients can be conscripted to share labor burdens. From 1999 to 2001, Bill Polich, then chief executive officer of 3PF, a third-party fulfillment provider for dotcom retailers, rewrote client service contracts to include a clause that if temps were needed, the client would share the cost. That provided considerable help to Polich, who is currently developing a new venture, since business was booming during those high-flying Internet-bubble days.

A more basic approach to prevent labor woes during a business surge is to draft job descriptions. That may seem out of the question when the phone is ringing off the hook, orders are flooding in, and apparently any extra body would help. It takes discipline to draft a description and go about hiring the right person. But as any manager knows, the wrong hire in a key position can hinder rather than help.

Drafting a job description also helps small-business owners avoid the tendency to hire managers with similar backgrounds and skill sets — and biases — as their own. “In a small-company environment,” according to Polich, “you automatically lose the luxury of hiring in your own image.” Small-business owners must be aware of their own strengths and weaknesses and hire lieutenants to balance them. Writing a job description is one way to separate the help business owners really need from what they merely think they need, experts say.

A more drastic way to cope between an imbalance between labor and demand is to curb customers’ requests for the product. If demand is getting unwieldy, some experts say, de-emphasize marketing and controlling the company’s media exposure. To be sure, turning down a chance for press coverage might sound extreme. Indeed, Doyle says, if he were to repeat his experience, he would still want to appear on Gourmet’s cover even though he was barely prepared for the deluge of business that followed.

But in most cases, managers must discipline themselves to mull the implications of media coverage on their businesses. In other words, will an appearance in the media result in a workload that’s tests the company’s capacity to meet it?

Similarly, they might consider ways to lure only the most desirable customers. At Jubilee, for instance, Doyle at one point stopped taking direct personal orders and instead devoted all his resources to fulfilling existing catalog orders. He also told catalog customers he couldn’t accommodate any more orders. That’s a perfectly acceptable response to clients, says Clarke. It’s also much better than failing to deliver on obligations.

Advertising on the Internet to a desired audience is one way companies can manage the quality of contacts they get, notes Clarke. Search-engine optimization is another: For example, using keywords like “premium” or “high-end” can help exclude unprofitable contacts.

Joining associations and networking can also help small-business executives find profitable customers. Carline Ferailleur, owner of Atlanta-based CF Professional Translations, a translation and interpreting service, for example is a member of the National Association of Women Business Owners. At one meeting, she learned that the Georgia Women in Business Council certifies woman-owned businesses.

Once such businesses are certified via a rigorous review process, they’re entered into a database from which members of a consortium of major companies like Delta Airlines look for service providers. Ferailleur, an African-American, is planning to apply for a similar business certification for minority business owners so she can bid for local government contracts. Such connections enable Ferailleur to avoid wasting valuable time on customer relationships that don’t pay off.

Strapped for Cash

Besides labor shortages and excessive demand, inopportune growth can also throttle needed cash flow. Outlays for growth-fueled expenses can cause companies to be short on dollars to pay for hiring, travel, administration, and other costs of getting the work done.

Such a situation can be especially stressful for businesses less than two years old. That’s because most banks have the policy that companies must have operated for at least two years in order to qualify for a business loan. Such was the case with Ferailleur and her one-woman translation business, which just turned two last month.

Indeed, requests for Ferailleur’s services were becoming overwhelming. At the same time, she still didn’t have enough income to hire administrative help. So she did work herself, spending at least 20 hours a week on accounting and paperwork. That, she notes, was time she could have been spending on cultivating new business that might, in turn, pay for an administrative hire.

In such cases, the Small Business Administration offers loans for entrepreneurs. Last year, Ferailleur applied for and received a loan through the SBA’s MicroLoan program, which makes loans of up to $35,000 through local, non-profit intermediary lenders. (The average loan, according to the SBA website, is $10,500.) She used her $25,000 loan for marketing brochures, advertising, and memberships with organizations like the local Chamber of Commerce and the Better Business Bureau — all of which fueled her company’s growth through increased visibility. She also hired Ground Floor Finance’s Clarke for business consulting services.

When her business reached its two-year anniversary in November this year, she qualified for a $24,000 line of credit from Washington Mutual, which also extended her a business credit card with a $5,000 limit. She can now pay for subcontractors without having to wait for clients’ payments. She can also spend on business travel and other expenses without being strapped until reimbursement from clients.

Credit, therefore, has made life much easier for Ferailleur. Before that, however, the cost of growth had been steep. “As demand for my services were greater, the need to finance the growth became urgent,” she recalls. “Everything that came in went right back out.”